The cannabis industry is fast-growing, and increasingly becoming legal. Five states voted on Election Day to legalize medical or recreational cannabis, pushing the number of states that allow medical cannabis to 35, and recreational cannabis is now legal at the state level in 15 U.S. states (though it's still illegal at the federal level in the U.S.).
As more markets open up to legal products, there will be even more opportunities for the best companies to win. Two that should be on investors' radar are The Valens Company (VLNS) and Chart Industries (GTLS 0.10%). Valens is a leading extractor of cannabidiol oils, such as CBD, that are then used to make products, while Chart manufactures cryogenic gas processing equipment for a variety of industries.
On Oct. 14, Motley Fool analyst Emily Flippen and Fool contributor Jason Hall, host of "The Wrap" on Motley Fool Live, discussed the prospects for both Valens and Chart in the cannabis space. Watch the video or read the transcript to learn more about these two companies and their prospects in the quickly changing cannabis landscape.
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Emily Flippen: This was an easy company for me to mention because they're actually supposed to be reporting after market closed today, so any minute now. I haven't seen the report come through, but the company I'm talking about is the Valens Company, formerly known as Valens GroWork. I just went ahead and put their ticker in the chat, but the ticker is traded over the counter VLNCF. The Valens Company, and the reason why you haven't heard of it, Jason, is because it's a cannabis company. They're actually in the business of extraction, meaning they operate as a middleman. They take the flower, the cannabis that cultivators grow, and they turn it into the pretty products that you see on your shelves. The reason why I'm really excited to see what happens for this company is because Valens has been a really, really strong performer up until last quarter. Last quarter, they got absolutely hammered because as especially Canadian cannabis companies struggled both in the wake of oversupply in Canada but also as a result of the coronavirus pandemic, guess who went away? The people who needed them for their tolling arrangements, people sending them cannabis needing products out. But the business model itself is really strong. They have a really strong white-label business, which is to say that they actually are in the business of taking the cannabis from suppliers and turning it into end products and slapping the label on it. They have a lot of really interesting product lines that are really high margin for them. So I'm hoping that this next quarter will be better, if they are profitable, even better than that, because the last quarter was not particularly strong. We'll see when that report comes out. I'm still waiting for it, but hopefully soon.
Jason Hall: Are they like a private-label manufacturer in the consumer goods business, only it's cannabis?
Emily Flippen: That's a really good way to think about them. They are the people that do lots of different business lines. They have business lines that are just what they call tolling arrangements, where if you're a cannabis company and you grow yourself some cannabis, but you actually want to sell oil, you will send the cannabis to them, they'll send you back oil that's been extracted from that cannabis. That's the business that fell off last quarter, but the highest margin business they have is people who they're growing the cannabis, they're cultivating it, extracting it, and then putting somebody else's label on it. That's really, really lucrative for them from a business model perspective and all of those agreements are etched out in longer year terms, so it ends up being a pretty predictable and reliable source of revenue as well. It's not risk-free though, obviously.
Jason Hall: None of those are risk-free. You have to go into that with that expectation. There's only really one thing that I want to know about that company and most companies that do that. Do they use Chart Industries equipment as part of their process of extracting oil? That's all I care about. I love Chart Industries. It's a Rule Breakers recommendation by David. This I think is a hidden opportunity for them to really grow as a supplier. You need to find that out for me.
Emily Flippen: Actually, I know the answer. I looked closely at Chart Industries whose ticker is GTLS, I believe.
Jason Hall: Yes, which basically is gas-to-liquids.
Emily Flippen: Yes. I looked at it closely for the Marijuana Masters portfolio. Didn't end up running with Chart Industries not only because cannabis is such a small part of their business line but because companies like Valens are using their own technology. When you think about all the different oils and products, the CBD, but also all the other compounds, the cannabinoids that are extracted from cannabis, ultimately having that proprietary technology, if you're Valens in this case and say, we do five different types of extraction depending on what you want to get out of the plant, that ends up being their value proposition.
Jason Hall: Also, you're building a competitive advantage. That's what you're doing.
Emily Flippen: Exactly. It's not to say that Chart Industries or the many other companies in the extraction space aren't going to be successful. I think Chart Industries, if you're looking for a less risky way to play this space, is a great, great option. Valens is more of the pure-play on the cannabis space. When cannabis producers fall off as we've seen them do over the past year, when those fall off, Valens is impacted much more than a company like Chart Industries would be.